For now, remaining in rally mode is “job one” for stocks

Brian Nick

The last week’s market highlights:

Each week, we present our featured topics in the context of the major themes listed below from Nuveen’s Q2 Update:
  • U.S. economy: Looking for a relatively rapid recovery in the second half of 2020.  
  • Global economy: Europe may begin to outperform the U.S. in Q3.    
  • Policy watch: Fed to guide the economy even after the country reopens.
  • Fixed income: Stay defensive, stay diversified.    
  • Equities: Focus on quality companies at reasonable valuations. 
  • Asset allocation: Consider benefits of active management amid idiosyncratic opportunities.

Quote of the week:

“What a field day for the heat
A thousand people in the street.
Singing songs and carrying signs
Mostly say, ‘Hooray for our side’.” --- Buffalo Springfield, “For what it’s worth”

The ECB puts some more PEPP in its step

Federal Reserve and European Central Bank (ECB) meetings, usually must-see events for investors even under “normal” circumstances, have garnered more intense scrutiny over the past few months, as markets focused on each central bank’s policy responses and economic outlooks amid the COVID-19 pandemic. With Chair Jerome Powell and his colleagues on tap for this Wednesday, June 10, last week all eyes were on the ECB’s June 4 meeting.
Following weeks of devastatingly poor economic data reports, ECB President Christine Lagarde’s downbeat assessment of the eurozone economy didn’t come as a surprise. She emphasized that the region “is experiencing an unprecedented contraction,” in the face of “exceptionally elevated uncertainty.” Against that backdrop, the ECB lowered its 2020 GDP growth outlook by a whopping 9.5 percentage points, to -8.7% from +0.8% just three months ago.7​
Encouragingly, the ECB announced further measures to try to arrest this unprecedented decline. Chief among them: the central bank pledged to buy €600 billion ($680 billion) of eurozone sovereign and corporate bonds under its Pandemic Emergency Purchase Program (PEPP), a quantitative easing (QE) effort initiated in March. This amount exceeded expectations of €500 billion and brings the PEPP’s total planned purchases to €1.35 trillion. And the ECB promised to keep buying bonds until it “judges that the coronavirus crisis phase is over”—at least through June 2021.
Beyond the ECB’s monetary support, last week also saw fiscal stimulus from Germany, the eurozone’s largest economy. The German government will provide €130 billion of “juice” through a combination of tax cuts and rebates on electric cars. When added to the country’s previously enacted spending measures and tax breaks, this package raised Germany’s COVID-19 emergency response tally to over €1.2 trillion.8 Meanwhile, all of the other 18 eurozone countries have also launched fiscal stimulus and spending measures to varying degrees.
The eurozone seems to be responding to this type of broad economic support, but it’s far from out of the woods. IHS Markit’s Composite Purchasing Managers’ Index (PMI), a gauge of manufacturing and service-sector activity, bounced from April’s all-time low of 13.6 to 31.9 in May—still well below the 50 mark separating contraction from expansion.9 Among the components of the PMI, new business orders fell sharply, pointing to continued weak demand, but levels of pessimism lifted noticeably.
Labor market figures for the region were also encouraging. The unemployment rate for the eurozone edged up just 0.2% in April, much less than expected, to 7.3%. That’s where it stood in December 2019—months before the coronavirus began to spread through Europe.10
One potential reason for this better-than-anticipated result: wage subsidies. Under this arrangement, payrolls are kept intact, with eligible employees receiving a check equal to all or most of their wages—up to 90% in the Netherlands, for example—while not working or working only part-time.11 The benefits of this approach are twofold. One, employees gain immediate financial relief; two, business owners are spared from having to hire and retrain staff once they reopen their doors.
That said, there’s a weakness to the paycheck subsidy approach: it’s effective only if the businesses that cut the checks stay alive. And to the extent businesses fail in the coming months, it’s possible Europe’s labor market will deteriorate more noticeably.  A hopeful sign is that Europe’s reopenings are ahead of those in the U.S. in many respects. For example, children have returned to school, allowing parents to rejoin the workforce.

May’s jobs report: Wow!

No one saw that coming.
Confounding economists and analysts from Albania to Zimbabwe:
  • U.S. employers added a record 2.5 million payrolls in May, versus forecasts for a loss of 7.5 million jobs.12
  • The unemployment rate fell from a post-World War II record of 14.7% to 13.3%, compared to expectations for a surge to 19%.13
Other good news included an increase in the labor force participation rate (from 60.2% in April to 60.8% in May) and a 1% decrease in average hourly earnings growth for May.14 Although that latter data point sounds like a negative, it actually partly reversed a disturbing aspect of the recent economic upheaval: lower-wage earners—those most likely to experience financial stress—were disproportionately laid off in April. May’s drop in average pay indicates that at least some rank-and file employees in retail, restaurants and other lesser-paying sectors of the economy were back on the job.
Not to pour cold water on this “May miracle,” but investors should consider a few caveats:
  1. The jobs report is based on a survey and therefore subject to sampling error. (Sampling errors occur when the results found in the sample don’t represent those that would have been obtained had the entire population been surveyed.)
  2. Individuals may have misclassified their employment status, claiming they were “employed but absent from work.” Enough respondents of this type could conceivably lower the unemployment rate by a few percentage points.
  3. “One swallow does not a summer make.” Put another way, remember that this data covers just one month. While the reopenings across the country are proceeding smoothly, the labor market could backslide in the face of a second wave of the virus or if social distancing prevents certain key segments of the economy from firing on all cylinders. Restaurants, retail stores and travel, for example, could be especially hard hit under such circumstances.
Also, there are more than 10 million part-time workers who would prefer to be employed full time. And more than 42 million people have filed first-time unemployment claims in the past 11 weeks.15
Let’s not end on a sour note, though. This is fantastic news for the U.S. economy and helps validate the recent risk-on rally. The S&P 500 soared 2.6% in the wake of the payroll report’s release on Friday, June 5, lifting its gain since bottoming on March 23 to a remarkable 42%.16 Europe’s STOXX 600 Index has also rebounded strongly (+34% in euro terms) over that stretch, capped by last week’s 7% advance.17
  1. Marketwatch
  2. Haver
  3. Haver
  4. Bloomberg
  5. Bloomberg
  6. Haver
  7. ECB press release (Reuters)
  8. CNN, BBC
  9. IHS Markit
  10. Bloomberg
  11. Wall Street Journal
  12. BLS, Marketwatch
  13. BLS, Marketwatch
  14. BLS, Haver
  15. BLS, Haver
  16. Marketwatch, Haver
  17. Bloomberg, Haver
This material is prepared by and represents the views of Brian Nick, and does not necessarily represent the views of Nuveen LLC, its affiliates or other Nuveen staff.
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